Two weeks before Nicholas Schorschs company RCS Capital announced a deal to become one of the largest independent broker-dealers in the country, he called Eric Schwartz, founder of Cambridge Investment Research, another of the nations broker-dealer giants.
Schwartz could guess what he was after, but took the call anyway.
I knew what his end goal was and I said Id certainly be happy to hear the story, Schwartz says. Hey, its not every day you get a chance to talk to somebody whos as smart as him. He spoke very openly and honestly and I was impressed, but its not our cup of tea, so to speak.
Whether big or small, Schwartz says Schorsch is taking a run at everybody in the independent broker-dealer space.
RCS Capital surprised just about everyone in the industry this week when it acquired one of the largest networks of IBDs, El Segundo, Calif.-based Cetera Financial Group, with 6,600 advisors. Overnight, that deal makes RCS, also known as RCAP, the second-largest IBD in the country as measured by advisor headcount, behind only industry leader LPL Financial, with its 13,300 advisors.
Furthering its momentum, RCAP announced on Friday that it is buying a much smaller broker-dealer, J.P. Turner, for $27 million in cash and stock. About 325 advisors affiliate with the firm.
That brings the total number of RCAP advisors to more than 9,000, with the holding companys acquisitions of several IBDs last year, including First Allied.
LPLs growth story in recent years has been meteoric, placing it among the largest financial services firms in the nation, in the No. 4 spot behind three large wirehouses. But, fast as its been, LPLs trajectory looks iterative next to RCAPs furious pace.
Known as an innovator in alternative investment products, including unlisted REITs, which have come under scrutiny, RCAP has made it clear that it is openly looking to take on the wirehouses, alongside LPL.
In their call, Schorsch laid out his strategy for Schwartz.
They are trying to build a vertical integration like the wirehouse firms, says Schwartz, who expects RCAP may become self-clearing across most divisions of the company. Obviously, theres a reason to assemble [different functions and firms] all under one roof because you believe you can get greater distribution of their [alternative] products. Im sure, from their side, they will say they will serve the advisors better, but its also about sales.
He adds: Its doesnt surprise me about Cetera because [Cetera] has always been about the money. Hes been offering some very attractive prices.
Schorsch didnt offer a price for Fairfield, Iowa-based Cambridge, Schwartz says, because the conversation didnt get that far.
Cambridge is widely regarded as unique among the large IBDs for its down-to-earth culture in which the firms advisors can still get Schwartz on the phone. Schwartz moved the firm from the Washington D.C. area to a more affordable headquarters in the Midwest in order to drive down expenses and preserve its homespun values.
He and his company leaders are in the process of implementing a company structure that will transfer ownership internally among successive generations of leaders and, they hope, preserve the firms independence in perpetuity.
For a large sum of money from Schorsch, Cambridge might have been able to skip all that work. Some critics say Schorsch is paying too much for Cetera in the $1.15 billion deal.
He is offering some really nice prices, Schwartz says. And its striking fear in some parts of the IBD world, he says.
Two days ago we were talking to a person who runs a small B-D, Schwartz says, and when I say small, I mean very small. He was concerned that [RCAP] would just roll up everyone.
Known as a bit of an academic among his IBD competitors, Schwartz says he found the conversation with Schorsch educational.
Its a fascinating thing to watch. Its going to be very interesting, he says. Non-traded REITs are no longer his focus so much. His focus is alts in general. He does believe that the alt space is going to be a continually rapidly growing area, so hes gotten into a lot of alternative manufacturers. I think that people coming from wirehouse firms who are used to seeing product manufacturing, and seeing that as a positive, they may see [RCAP] as a better destination than even an LPL, he says.
From a pure business point of view, I think he will be successful, Schwartz adds, but the more this happens, the few remaining firms like ours that are considered independent [will attract certain advisors]. Whenever you assemble a lot of firms into a large group like that to me, its a little sad to me to see the independent industry going that way.
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